Do You Get a Tax Break for Buying a House?

There are several financial benefits of homeownership. You can grow your wealth over time by paying off a piece of property and can enjoy stable monthly payments if you have a fixed mortgage. While the overall costs of owning a home are higher and buyers will have to cover repair and maintenance costs, many people feel owning a home is smarter financially in the long run.   

There are also potential tax savings opportunities that come with homeownership. Buying a home can unlock certain tax credits and deductions that you can apply annually when you file. Even one-time tax credits can help you save. 

Use this guide to learn about the various ways you can save on your tax bill. Get the answers you need for, “Do you get a tax break for buying a house?”

Tax Deductions You Can Receive When Buying a House

The first step is to identify potential tax deductions that you unlock when buying a house. Some deductions can be applied annually while others are single-use and relate to specific actions. 

A tax deduction reduces the amount of taxable income. For example, if you earned $80,000 but have $5,000 in tax deductions, then you would only be taxed for $75,000. A common mistake people make is assuming the deduction is on their final tax bill, not on their taxable income. 

Here are three tax deductions you should know about if you are preparing to buy or already own your house.

Mortgage Interest Deduction

The first thing to take advantage of as a homeowner is the mortgage interest deduction, which allows you to deduct the amount you paid in interest throughout the year. This deduction kicks in as soon as you make your first mortgage payment, so you can apply it even if you bought a house in the middle of the year. 

To calculate this deduction, look at the amortization calendar for your mortgage. This differentiates the principal and interest so you can see how much interest made up your monthly payments for the year. Your lender should also send out Form 1098 in January, which states exactly how much they received in mortgage interest. Using Form 1098 prevents you from accidentally including property taxes, insurance, and escrow in your deduction.   

To receive this tax deduction, you will need to itemize your taxes and include Form 1098 when you file. You cannot accept the standard deduction and reduce your taxable income by reporting paid interest. The IRS also caps the mortgage interest deduction on the first $750,000 of your loan. This drops to $375,000 for married couples filing separately. 

You can include the mortgage interest credit annually until you pay off your mortgage debt. However, this deduction should also decrease each year. This is because your interest payments will get smaller as your mortgage debt shrinks. Your deduction should also decrease if you refinance your home to get a more favorable mortgage interest rate.

Property Tax Deduction

Another reason to itemize your taxes instead of accepting the standard option is so you can take advantage of the property tax deduction. This allows you to deduct the property taxes you paid on the state and local level from your federal returns. You can deduct the real estate taxes that you paid at closing, as well as any prorated amounts for the first year.

The IRS has a $10,000 cap on deducting state and local taxes (SALT) for properties you own. However, this is still a rate that many Americans fall below. This tax deduction benefits people who live in high-tax states. While you will have to pay higher taxes on a local level, you can reduce your taxable income on a federal level. 

To report the taxes that you paid, keep any tax documents you receive from the city or county where you live. You can also look online to see if there are tax documents proving what you paid. You also may need to include your closing documents in your tax forms to prove that you paid taxes when you bought or sold your house this year. 

This is another one of the tax breaks that you can include annually in your tax return. As long as you continue to pay local property taxes, you can deduct them (up to the cap) on the federal level.

Mortgage Points Deduction

You can also deduct any points that you purchased when buying a house on your federal tax return. Mortgage points are pre-paid interest that buyers purchase to reduce their annual interest rate. Most lenders charge around 1% of the loan amount per point to lower the interest rate by 0.25%. 

For example, if you have a $400,000 loan, then a point would cost $4,000. If you bought two points at $8,000 then your interest rate would drop from 6.75% to 6.25%. 

People buy points so they can pay less in interest and lower their overall monthly payments. They might choose to buy points if they already have a strong down payment and are looking for other ways to save. 

If you purchased points, you can deduct the full amount for the year that you pay for them. For example, if you buy a house with $8,000 in points, then you can deduct the full $8,000 the first year. You will not be able to deduct anything in the second year. The IRS also caps the deduction on the first $750,000 of your loan. Filers must also itemize their taxes and can only use the deduction for their primary residence. 

To prove that you have points to deduct, your lender will send a copy of Form 1098 in January. This is the same form that reports the interest you have paid. 

Are There Tax Credits for Homebuyers?

Tax credits reduce the amount you owe to the IRS. Credits are dollar-for-dollar opportunities to lower their tax bills. For example, if you owe $5,000 in taxes but take advantage of $1,000 in tax credits, then you would only need to pay $4,000. 

Taxpayers can apply both deductions and credits when they file. They will start by reviewing tax deductions to calculate their taxable income and then apply any credits to reduce the amount they owe. 

Homeowners can take advantage of multiple tax credits during their time occupying the property. Here are a few to be aware of.

First-Time Homebuyer Credits

In 2008, the Obama Administration debuted a first-time homebuyer federal tax credit that supported people who were buying homes. The credit gave buyers up to $7,500 for the first year that they filed their taxes after purchasing a home. While this program mainly supported first-time homebuyers, it also allowed people who hadn’t owned a home in three years to claim the credit. 

However, this program was discontinued in 2010 and has never been renewed. Many people often check for first-time homebuyer credits but cannot receive them on a federal level.

While you cannot add this credit to your federal taxes, some states and cities have adopted the practice. These credits are intended to help homebuyers in high-cost areas or encourage people to move to slower-growing towns and states. You may be able to add a first-time homebuyer credit to your local taxes and save money that way. 

Talk to your real estate agent to see what they know about local tax credits and research your options as well. If you haven’t bought a house yet, see if certain municipalities in your area offer these credits. They might create a compelling reason to adjust the location of your home search.

Energy-Efficient Home Improvement Credits

If you already own your home, you can earn up to $3,200 in tax credits for making improvements that increase the energy efficiency of your property. The tax credit is up to 30% of the project costs and doesn’t have to be applied during your first year of ownership. If you haven’t claimed this credit yet and are eager to make efficiency improvements, this credit could be a good thing for your home. 

Energy Star has several examples of projects that qualify for this tax credit. They include updating the windows and doors of your home, improving insulation, replacing water heaters and HVAC units, and installing solar or geothermal systems. You can even claim this tax credit just for completing a home energy audit.  

To claim this credit, save the bills for all of the energy efficiency improvements you made this year, whether it was a single project or multiple small projects. Then take 30% of the cost and apply it to your tax bill. For example, if you spend $10,000 on new solar panels, you can receive up to $3,000 in tax credits. 

These credits only apply to improvements on existing homes, not the construction of new homes. If you notice that your house has some energy efficiency weaknesses, you can explore your improvement options and the credits that come with them. 

When calculating your credit, remove any incentives or rebates from the final cost. Accepting a rebate and then deducting the full amount from your taxes is misrepresenting the true cost of the project.

Tax Considerations at Closing

If you bought a house in the middle of the year, you might not be concerned about filing your taxes. However, it is important to keep taxes in mind as you sign your closing documents and file them into your records. When the time comes to submit your itemized taxes in the spring, you will be happy you were so organized at the time. 

First, make a note of anything that is deductible in your closing documents. You don’t want to leave any tax breaks on the table. In most cases, the line items you will want to pay attention to include your real estate taxes and any mortgage points you bought separately from your down payment.

Next, look at your mortgage documents and consider how much interest you expect to pay in the coming months. This can help you estimate your deductions, along with the mortgage interest paid on the home you sold. Make sure you have a contact for your lender or access to a mortgage portal to access Form 1098 in the spring.

Know that most closing costs are not tax deductible. These include your title fees, home inspection costs, and other expenses that come with the home purchase or sale. While you can combine several tax deductions when it’s time to file, you can’t include everything in the closing paperwork. 

Try to keep good records as a homeowner as well. Track any energy-saving home improvements you make and keep the receipts for repairs and upgrades. Tax legislation is always changing and new tax breaks or credits for homeowners could be approved. 

Know Your Tax Benefits Before You Purchase a Home

There are plenty of tax benefits you can use after you purchase a home, but it’s important to have a clear picture of your tax burden and opportunities before you enter the real estate market. This can prepare you to pay property taxes while saving the necessary paperwork to prove that you qualify for various breaks. The more organized you keep your financial documents, the likelier you are to reduce your tax burden once it’s time to report your income to the IRS. Tracking everything from your down payment to points purchased can make a big difference.   

Consider working with a tax professional or financial expert once you are ready to buy your home. You can also ask your real estate agent about taxes and see if they can refer an accountant to you. You don’t have to be a tax expert if you have someone who is by your side. 

Take the first steps to buy a house with FastExpert. Search for Realtors in your area who know the housing market, lending process, and local tax benefits. Read agent profiles to find good fits for your needs and then interview top contenders. The right agent can make you feel confident in the purchase process and guide you even after the closing appointment. The right agent is waiting for you.